Instacart celebrates their IPO at the Nasdaq on Sept. 19th, 2023.
After a 21-month tech IPO freeze, the market has cracked opened in the past week. But the early results can’t be encouraging to any late-stage startups lingering on the sidelines.
Chip designer Arm debuted last Thursday, followed by grocery delivery company Instacart this Tuesday, and cloud software vendor Klaviyo the following day. They’re three very different companies in disparate parts of the tech sector, but Wall Street’s reaction has been consistent.
Investors who bought at the IPO price made money if they sold right away. Just about everyone else is in the red. That’s fine if a company’s goal is just to be public and create the opportunity for employees and early investors to get liquidity. But for most companies in the pipeline, particularly those with sufficient capital on their balance sheet to stay private, it offers little allure.
“People are worried about valuations,” said Eric Juergens, a partner at law firm Debevoise & Plimpton who focuses on capital markets and private equity. “Seeing how those companies trade over the next couple months will be important to see how IPO markets and equity markets more generally are valuing those companies and how they may value comparable companies looking to go public.”
Juergens said, based on his conversations with companies, the market is likely to open up further in the first half of next year simply because of pressure from investors and employees as well as financing requirements.
“At some point companies need to go public, whether it’s a PE fund looking to exit or employees looking for liquidity or just the need to raise capital in a high interest rate environment,” he said.
Arm, which is controlled by Japan’s SoftBank, saw its shares jump 25% in their first day of trading to close at $63.59. Every day since then, the stock has fallen, and it closed on Thursday at $52.16, narrowly above the $51 IPO price.
Instacart popped 40% immediately after selling shares at $30. But by the end of its first day of trading, it was up just 12%, and that gain was practically all wiped out on day two. The stock rose 1.8% on Thursday to close at $30.65.
Klaviyo rose 23% based on its first trade on Wednesday, before selling off throughout the day to close at $32.76, just 9% higher than its IPO price. It rose 2.9% on Thursday to $33.72.
None of these companies were expecting, or even hoping for, a big pop. In 2020 and 2021, during the frothy zero interest rate days, first-day jumps were so dramatic that bankers were criticized for handing out free money to their buyside buddies, and companies were slammed for leaving too much cash on the table.
But the lack of excitement over the past week — amounting to a collective “meh” across Wall Street — is certainly not the desired outcome either.
Instacart CEO Fidji Simo acknowledged that her company’s IPO wasn’t about trying to optimize pricing for the company. Instacart only sold the equivalent of 5% of outstanding shares in the offering, with co-founders, early employees, former staffers and other existing investors selling another 3%.
“We felt that it was really important to give our employees liquidity,” Simo told CNBC’s Deirdre Bosa in an interview after the offering. “This IPO is not about raising money for us. It’s really about making sure that all employees can have liquidity on stocks that they work very hard for. We weren’t looking for a perfect market window.”
Odds are the window was never going to be perfect for Instacart. At the tech market peak in 2021, Instacart raised capital at a $39 billion valuation, or $125 a share, from top-tier investors including Sequoia Capital, Andreessen Horowitz and T. Rowe Price.
During last year’s market plunge, Instacart had to slash its valuation multiple times and switch from growth to profit mode to make sure it could generate cash as interest rates were rising and investors were retreating from risk.
The combination of the Covid delivery boom, low interest rates and a decade-long bull market in tech drove Instacart and other internet, software and e-commerce businesses to unsustainable heights. Now it’s just a matter of when they take their medicine.
Klaviyo, which provides marketing automation technology to businesses, never got as overheated as many others in the industry, raising at a peak valuation of $9.5 billion in 2021. Its IPO valuation was just below that, and CEO Andrew Bialecki told CNBC that the company wasn’t under pressure to go public.
“We’ve got a lot of momentum as a business. Now is a great time for us to go public especially as we move up in the enterprise,” Bialecki said. “There really wasn’t any pressure at all.”
Klaviyo’s revenue increased 51% in the latest quarter from a year earlier to $165 million, and the company swung to profitability, generating almost $11 million in net income after losing $11.7 million in the same period the prior year.
Even though it avoided a major down round, Klaviyo had to increase its revenue by about 150% over two years and turn profitable to roughly keep its valuation.
“We think companies should be profitable,” Bialecki said. “That way you can be in control of your own destiny.”
While profitability is great for showing sustainability, it isn’t what tech investors cared about during the record IPO years of 2020 and 2021. Valuations were based on a multiple to future sales at the expense of potential earnings.
Cloud software and infrastructure businesses were in the midst of a landgrab at the time. Venture firms and large asset managers were subsidizing their growth, encouraging them to go big on sales reps and burn piles of cash to get their products in customers’ hands. On the consumer side, startups raised hundreds of millions of dollars to pour into advertising and, in the case of gig economy companies like Instacart, to entice contract workers to choose them over the competition.
Instacart was proactive in pulling down its valuation to reset investor and employee expectations. Klaviyo grew into its lofty price. Among high-valued companies that are still private, payments software developer Stripe has cut its valuation by almost half to $50 billion, and design software startup Canva lowered its valuation in a secondary transaction by 36% to $25.5 billion.
Private equity firms and venture capitalists are in the business of profiting on their investments, so eventually their portfolio companies need to hit the public market or get acquired. But for founders and management teams, being public means a potentially volatile stock price and a need to update investors every quarter.
Given how Wall Street has received the first notable tech IPOs since late 2021, there may not be a ton of reward for all that hassle.
Still, Aswarth Damodaran, a professor at New York University’s Stern School of Business, said that with all the skepticism in the market, the latest IPOs are performing OK because there was a fear they could drop 20% to 25% out of the gate.
“At one level the people pushing these companies are probably heaving a sigh of relief because there was a very real chance of catastrophe on these companies,” Damodaran told CNBC’s “Squawk Box” on Wednesday. “I have a feeling it will take a week or two for this to play out. But if the stock price stays above the offer price two weeks from now, I think these companies will all view that as a win.”
Take-Two shares tumble as Rockstar Games publishes Grand Theft Auto trailer early after leak
Strauss Zelnick, CEO of Take Two Interactive.
Adam Jeffery | CNBC
Shares of video game publisher Take-Two Interactive Software fell 4% in extended trading on Monday after the company released its trailer for the next version of the Grand Theft Auto game, which will come out in 2025. The company had originally planned to put out the trailer hours later, at 6 a.m. ET. on Tuesday, Dec. 5, but a leak caused Take Two to move up its timeline.
The video was originally leaked on X, formerly known as Twitter. After that, Rockstar Games, a subsidiary of Take-Two, published the trailer on YouTube.
Grand Theft Auto VI is likely to impact Take Two shares upon its release. Grand Theft Auto V debuted in 2013, and it’s now the second best-selling video game in history, having sold more than 190 million copies. It’s only behind Microsoft-owned Minecraft, of which over 300 million copies have been sold.
Gamers have been eager for details about the new game for years. Sam Houser, Rockstar’s founder, announced in early November that the trailer would come out in December.
“As the label approaches its 25th anniversary next month, we congratulate Rockstar Games on their constant innovation in the pursuit of the highest quality interactive entertainment,” Take-Two CEO Strauss Zelnick told analysts on a November conference call.
You can watch the new trailer below:
Uber shares pop as company is slated to join S&P 500
Uber CEO, Dara Khosrowshahi speaks during the “Intentional Equity in Sustainability” conversation at the Asia-Pacific Economic Cooperation (APEC) Leaders’ Week in San Francisco, California, on November 15, 2023.
Andrew Caballero-Reynolds | AFP | Getty Images
Uber’s spot in the benchmark index is not official until Dec. 18, according to a press release, but it is common for the stock to rise, since investors know that managers of index funds that track the S&P 500 will add it to their portfolios. Uber will replace Sealed Air Corp. in the S&P 500.
Analysts at Oppenheimer reiterated their outperform rating on the stock and raised their price target to $75 per share from $65. They said Uber’s ticket into the S&P 500 will likely help improve investors’ sentiment about returns.
“Following the inclusion, we expect UBER to lean into growth and share buybacks, which should increase investor sentiment for growth/return in 2024,” the analysts wrote in a note Sunday.
Members of the index must have positive earnings in the most recent quarter and over the prior four quarters in total, according to S&P’s rules. Uber reported net income of $221 million on $9.29 billion in revenue for its third quarter, and in the past four quarters altogether, it generated more than $1 billion in profit.
Uber also has a market cap of about $118 billion, which surpasses the S&P’s criteria that companies must have an adjusted market cap of at least $14.5 billion.
— CNBC’s Michael Bloom contributed to this report.
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Twilio lays off 5% of employees in unit activists want to divest
Jeff Lawson, chief executive officer of Twilio Inc., during the Singapore FinTech Festival in Singapore, on Friday, Nov. 17, 2023.
Lionel Ng | Bloomberg | Getty Images
Software provider Twilio said Monday it would lay off roughly 5% of its workforce, or around 400 employees, citing underachievement in the growth of a unit that activist investors have targeted.
Shares of Twilio were flat on the news.
According to a letter from CEO Jeff Lawson attached to a regulatory filing, the cuts are part of a broader plan to streamline Twilio’s offerings. The company is also sunsetting its Programmable Video product as part of the plan.
The cuts will strike deepest in Twilio’s Data & Applications unit, the same unit that activist investors at Legion Partners and Anson Funds are pushing Twilio CEO Jeff Lawson to divest. Legion Partners declined to comment.
“Last year, we made the decision to invest, ahead of growth, in go-to-market for Segment,” Lawson said in a letter to staff, referring to a Twilio offering that is part of its data & applications group. “Unfortunately, that bet hasn’t led to the growth outcome we’d hoped for.”
Twilio cut 17% of its workforce, or about 15% of its employees, in February.
This is a developing story. Please check back for updates.
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